Navigating the World of Investing Through ETFs

Original post

Exchange-traded funds (ETFs) are hot.

So far this year, nearly $175 billion flowed into U.S. ETFs.

That’s equivalent to the market capitalization of financial giant Citigroup (NYSE: C).

Today, well over 1,700 ETFs in the U.S. alone collectively manage more than $3.4 trillion in assets.

I’ve written before about the six advantages ETFs have over their older and perhaps still better-known rivals, mutual funds.

To summarize:

  1. ETFs have no investment minimums, front-end loads or early redemption fees.
  2. ETFs offer real-time tracking.
  3. ETFs offer real-time trading.
  4. ETFs report their portfolios on a daily basis.
  5. ETFs are tax efficient.
  6. ETF fees are low – and some are even free.

Yet there is a big downside to the explosion in the popularity of ETFs.

Their sheer number has made ETF investing a more daunting task.

Twenty years ago, choosing an ETF was pretty simple. There was just a handful of funds available.

Most focused on providing exposure to a broad asset class – say, the S&P 500, European stocks or emerging markets.

And big index-tracking ETFs still dominate in terms of assets under management. For example, the SPDR S&P 500 ETF Trust (NYSE: SPY) manages $275 billion.

But today there are hundreds of specialized ETFs to choose from. So where do you start?

After all, with a click of the mouse, you can invest in the following:

  • More than 40 global stock markets.
  • More than 370 U.S. and global bonds all along the yield curve.
  • Red-hot market niches ranging from blockchain to biotech.
  • More than 500 smart beta ETFs, which invest in strategies that have outperformed the market over time.

More arcane strategies include merger arbitrage, real estate investment trusts, business development companies and master limited partnerships.

So how do you make sense of this overwhelming choice?

Start by setting your investment objectives.

Are you simply looking for cheap exposure to U.S. stocks?

Do you want to invest in ETFs that provide steady monthly income? Or do you want to profit from short-term swings in the prices of specific sectors and themes?

Are you willing to swing for the fences and place leveraged bets?

Do you want to bet on a market correction, buying ETFs that go up when the market goes down?

Once you’ve established your investment objectives, you have to choose specific ETFs – and the platform on which to trade them.

Vanguard now allows you to trade hundreds of ETFs for free.

Fidelity just launched zero-cost index funds.

Can zero-cost ETFs be far behind?

Moving your money to a cheap platform could save you tens of thousands of dollars in fees over time.

Let me give you one remarkably cheap and simple “set it and forget it” ETF strategy that you can implement today.

You may be surprised to learn you can invest in every major listed company in the world through two low-cost Vanguard ETFs.

The Vanguard Total Stock Market ETF (NYSE: VTI) invests in approximately 100% of the U.S. stock market and includes large cap, midcap, small cap and microcap stocks.

The Vanguard FTSE All-World ex-US ETF (NYSE: VEU) invests in 2,539 stocks of companies located in 46 countries.

Together, these two low-cost, passive funds own about 5,000 different stocks.

The cost?

A mere 0.04% per year for the Total Stock Market ETF and 0.11% per year for the FTSE All-World ETF.

That’s equal to a mere $4 or $11 per year, respectively, for each $10,000 you invest.

In the months ahead, I will help you navigate the complex world of ETFs so you can reach your financial independence that much faster. Stay tuned!

Good investing,

Nicholas